EDITORIAL: Taxes a hurdle for economic zones

The government should have a rational discussion with its agencies about tax incentives amid irrational arguments and disputes over proposed measures, as the tax issue has become a major hurdle in the launch of the “free economic pilot zones” program.

The nation is running out of time to restructure its economy and industries, and cannot afford any missteps while the economy keeps losing steam and corporate competitiveness dwindles.

In the program’s next phase, the scope of the zones is to be expanded to science parks, industrial areas and even some areas developed by local governments, rather than being limited to Taiwan Taoyuan International Airport and the nation’s five major harbors.

The government aims to encourage investment and industrial cooperation in those zones, with the ultimate goal of upgrading the nation’s industries and economic competitiveness.

New measures adopted in the second phase are likely to be more capable of boosting collaboration and investments than those in the first phase, government officials said.

The Financial Supervisory Commission planned to gradually ease restrictions on the trading of some financial products, including allowing offshore banking units and offshore securities units to sell more products and to broaden their customer base. The commission expects those deregulations to attract NT$300 billion (US$10.2 billion) in investment within five years of the new measures coming into effect.

More importantly, foreign investors will have preferential treatment over investors from WTO nations, and more tax incentives will be available for overseas investors and foreign employees.

Government officials expect the roll-out of the free economic pilot zones scheme to give Taiwan’s tepid economy a much-needed boost.

However, Council for Economic Planning and Development Minister Kuan Chung-ming (管中閔), the mastermind behind the scheme, recently suffered a setback when Premier Jiang Yi-huah (江宜樺) requested that government officials re-examine the whole program amid heated debate about whether new tax breaks should be applied to foreign investors operating in the zones.

The overhaul will pose a risk to efforts to roll out the second phase of the program in the middle of next year, as the Cabinet originally expected to push the program through the Legislative Yuan by the end of this year. The likelihood of that happening has diminished significantly.

Offering tax breaks is not a “weapon” to solicit overseas investors’ interest in Taiwan as Minister of Finance Chang Sheng-ford (張盛和) told lawmakers during a question-and-answer session on Monday.

Deteriorating national deficit and the waning magic of tax breaks are Chang’s main concerns. The council expects the new tax credit to cut tax revenue by NT$114 million a year.

The government has used tax credits as an important tool in soliciting overseas investment. Taiwan imposes just 17 percent in business income tax, which is lower than China’s 25 percent and South Korea’s 22 percent. That means that Taiwan’s tax environment is already favorable to foreign businesses.

However, tax breaks have almost become a prerequisite in the intensifying global trade war, especially after China and South Korea included them in their own newly established free trade zones.

To minimize erosion from tax breaks, the government should narrow down the program’s coverage.